Quietly at first but less so now, Germany is breaking out of its postwar identity – the assumptions and understandings that held it in place for 60 years. Germany is shedding the past, busting old taboos and being more assertive. What an evolving Germany will look like in 20 or even five years is unclear, but will have profound consequences for Europe and the West. Much of the recent breakout is due to a rising German industrial base achieved by elbow grease, niche market savvy, and, as is often said here, by "doing our homework."

Germans have looked around lately to find they have the preeminent world-class export economy in Europe. No one else comes close. German precision tools are coveted in Asia and Russia like Fabergé eggs. Germany is building much of the Summer Olympic and World Cup facilities in Brazil. The next generation of Eurostar trains linking the Continent and Britain will be made by Siemens of Germany, not, as they traditionally have been, by Alstom of France – a blow to French pride.

Postwar ideals and institutions that bound Germany into Europe – Yalta, European Union integration, NATO and transatlantic solidarity, the Franco-German alliance – are still visible. But they are less central to Berlin as time moves on. New generations of Germans read about Auschwitz as ancient history, and kids in Berlin schoolyards play with Russian children. Old taboos about patriotism and flag-waving are waning. Germany appears a more "normal nation."

On some fundamental level, Germany's emotional postwar binding with Europe and America is giving way to a new "realism." A reunified Germany is talking openly about its own interests and not subordinating them to EU interests. It now talks, for example, about protecting its trade routes. That's certainly not unfair – it's just new.

"Germany feels Europe is holding it back and that it increasingly wants to go global alone – faster, further, and better," says Ulrike Guérot, director of the European Council on Foreign Relations in Berlin. "There is a gap between the old rhetoric and the new reality."

A decisive moment in the breakout was the Greek financial crisis last spring. German Chancellor Angela Merkel waited 10 days before agreeing to jointly rescue Greece and the euro. Germany subsequently has pushed new rules and realities for the EU, decided mostly in Berlin, as a price for help.

"NATO and EU integration was the model," says John Kornblum, a former US ambassador to Germany who is now a corporate lawyer in Berlin. "The model is now disappearing and that makes people nervous. We are at the end of a postwar European romance about Europe. Germany doesn't want to pay for the romance anymore."

Germany's new global strategy seeks markets and relations in every direction – from Brazil and China to Vietnam and India. France no longer exercises its capacity to "run Europe" but has become a kind of shadow partner of Berlin. Even the city of Berlin, with its bohemian nightclubs and vibrant arts community, has become a hip urban center – what some here consider the new Paris of Europe.

Germany makes no secret that it desires greater stability between Berlin, Poland, and Moscow. A new amity along the old Weimar corridor would signify a breathtaking change.

"The German-Polish and German-Russian policy planning staffs are in high gear," says a Scandinavian diplomat in Berlin. "It isn't just icing on the cake. It is a new cake. Germany is absolutely changing. It is breaking taboos. It is not going back to a cold-war identity."

THREE HOURS SOUTH of Berlin, tucked in an industrial park off a major highway near Dresden, lies the new headquarters of Roth & Rau, a solar technology exporter. It exemplifies what's driving the New Germany.

Three physicists from the Chemnitz University of Technology started the firm in the late 1990s after tiring of waiting for their former East bloc school to restructure. So they broke out. In 2000 they put together 40 workers and $3 million in sales. Today the firm employs 1,100 and does nearly $300 million in sales, mostly to Asia. Their glass-paneled headquarters, sitting on a hill with a vista of rolling terrain, looks like a modern Oz, something out of Silicon Valley rather than the former rusty East.

Typically, and crucially, what the Roth & Rau physicists found was a niche. They don't make solar panels. They went far narrower: They've refined the coating requisite for the silicon wafers in solar panels, and developed it into a conductive film that gets 16 percent more electricity out of the transaction between sun and panel. Chinese firms are enamored of the process (a delegation was on the factory floor as I toured operations), and Roth & Rau spiked exports to the Middle Kingdom by 75 percent last year.

The company's approach to business, and the world, helps explain Germany's rise as a 21st-century economic power. It isn't so much that Roth & Rau are dealing in an industry of tomorrow, though that doesn't hurt. It's the way the firm is doing it.

Overall, Germany spent $120 billion a year in the 1990s to unify the country and rebuild its infrastructure, training its sights on the global marketplace. That helped it pull away from the rest of the EU. Forty percent of Germany's exports now go to the so-called BRIC countries (Brazil, Russia, India, and China). The closest EU competitor ships less than 10 percent. German machine-tool exports alone spiked 128 percent between 2009 and 2010. The unemployment rate in Germany hit an 18-year low last fall – 7.5 percent.

The top exports of the new German economy are cars, chemicals, and machine tools. The Volkswagen factory in Wolfsburg, for instance, is openly setting out to beat Toyota.

Yet at the heart of the country's resurgence is something called the Mittelstand, of which Roth & Rau is an archetype. These are the more than 1,500 small- and medium-sized firms spread across the countryside that produce high-end niche products – from tools to sonar to precision parts for race cars. The Mittelstand account for more than half of German exports and 70 percent of its workforce.

Mittelstand characteristics are unique. Many, like Roth & Rau, are or were family owned. They operate on "old-fashioned" values of worker loyalty and core competency. When successful, they usually don't sell off: They plow profits back into the firm. They keep their production and quality control local. Mont Blanc pens, for instance, are sent around the world but produced in German plants.

"The Germans took seriously the idea that global competition will come from the BRICs, and they set about engineering a response," says a Western diplomat. "They started to make things; that's what they do."

The Roth & Rau brain trust, for example, decided early on that it would not sell coated solar wafers as an end product. What the company sells are the machines that make the coating process, and, equally important, the know-how to make the machines work. "We built this out of our former lives," says Silvia Roth, vice president of operations. "It was the right product at the right time – but we have to keep the gap with the Chinese."

By "keeping the gap," Ms. Roth means something central to the firm's survival and typical of the world-beating mittelstand culture. At Roth & Rau, everyone knows the machines they sell to China will be copied. They can't do anything about it. But they also know duplicating the precision-coating process isn't easy, and this has given them an estimated five-year jump on Chinese capability.

"China's strategy is to dominate solar," says Roth, who is something of a pioneer in solar R&D. "They want to be No. 1, and they may be able to, which is why we continue to evolve and develop."

To stay ahead, the company makes the sale of training and technology as important as hardware. It recently invested $10 million to develop a single device that combines the dozen steps in the wafer-coating process.

Innovation remains a central part of the firm's ethos, too. Since some breakthroughs in 2002, there's been no improvement in the science of silicon coatings – just advances in the efficiency of production. "But we think we are on the verge of a breakthrough," says Roth, citing a technology that they believe will boost the efficiency of solar panels from 16 percent to 20 percent.

Significantly, mittelstand firms create special relations between employer and employee, which helped them weather the recent economic crisis. Most Mittelstand did not lay off workers but simply reduced their hours. Workers didn't demand higher pay in exchange for stability and job security.

Worker loyalty and morale are central to the German approach. Roth & Rau operates a gym and a kindergarten on site for employees. Some senior managers teach physics classes at night, which helps them spot future talent. "We think in long-term relationships and that is different than hiring managers and workers that come and go," says Roth. "You can waste a lot of time fighting employees and never motivate them to do the 5 percent extra that makes the company most competitive."

Germany's concerted effort to build a panoply of world-competitive firms is one reason the public here has objected so strongly to bailouts of other EU nations, notably Greece and possibly Portugal. Germans value hard work and sacrifice, and they have little patience with those who they feel don't share the same ethic.

"We put a lot of pressure on ourselves to do our homework," says a senior German economic official. "We expect others to do their homework as well, and when they don't, it doesn't sit well here.... German products are high quality and competitive, and we have a strong industrial base in contrast with the British, and increasingly the US, which have moved to service."

But this thinking worries some smaller EU states and others who feel that Germany, as it rises out of the terra firma of Europe, will increasingly pursue its own self-interest and become more autonomous. Ms. Guérot notes that "history is no longer the clamp that holds Germany to NATO and the EU. The new generations see it differently."

To be sure, from the German perspective, the road ahead is not strewn with rose petals. Some German economists predict a "golden decade." But 75 percent of German workers haven't seen a substantial pay increase in many years. The Organization for Economic Cooperation and Development reports a shortage of labor in a workforce that is rapidly aging. Germans also worry that their export boom to Asia will eventually wane.

"We are a self-occupied giant," says Alexander Ritzmann, a former Berlin politician now with the European Foundation for Democracy. "There is a complete disconnect between the way others see Germany and how Germans see it. We always hear how well we are doing. For us, we are in crisis."

This lingering sense of insecurity is one of the forces motivating Germany economically and politically today. "Germans need a crisis to get their juices flowing," says a US executive in Berlin. "They have an incredible need to stay strong and keep stable. The Germans may be proud of their newfound confidence, but they may have difficulty expressing this in a way easy for others to take."

Certainly it hasn't been easy for some members of the EU to take. As Germany's economic clout has grown, so has its assertiveness in Europe – often abruptly and without the proper Dale Carnegie consultation. During the Greek fiscal crisis last year, Germany was initially hesitant to agree to any rescues. In May, Chancellor Merkel finally relented, amid panic for the euro, and signed on to a $1 trillion bailout fund.

Then last fall Merkel decided, along with France, to create a permanent bailout fund – one with specific conditions that may have eroded the financial position of Ireland, and possibly Portugal and Spain, by resulting in costlier debt repayments. More recently, Merkel opposed plans for a bigger bailout fund as well as the creation of euro bonds.

Underneath it all is the view that Germany is European enough already – and the fear that it will become the checkbook of Europe.

WHEN THE BERLIN WALL came down in 1989, the center of European gravity steadily shifted from the Franco-German Rhine to the middle of Europe. The rebuilt capital of Berlin is the powerful symbol unlinking Germany from its previous seat of power, Bonn, what novelist John le Carré termed "a small town in Germany." Any talk of a New Germany "has to start with Berlin," says Hans Stark, a professor at Sciences Po, a top French graduate school.

Few European capitals had a chance at rebirth late in the 20th century. But Berlin – bristling with building cranes in the 1990s – has. Unlike France with Paris, or Britain with London, Germany is not a one-city country. Berlin is Germany's intellectual and government capital, but not the commercial or industrial capital (Frankfurt and Munich, respectively).

That gives rebuilt Berlin something of an open and unfinished air. It's been compared to a combination of Boston and Washington. Social hierarchies here are newer than in traditional capitals of old Europe. You can wear your jeans to the opera. Apartments are huge by European standards, and cheap. Food is also inexpensive.

Yet for all the scrubbing and shine, Berlin is a city where 1 out of 5 inhabitants is on welfare. The German capital is poorer than the nation it oversees.

Low costs have made the city a magnet for artists and writers. By some estimates, more than 65,000 artists reside here. It is also an unofficial playground for the under-30 "globorati" who fly in on cheap flights from Barcelona, Spain, and Rome.

The city evokes an air of liberal tolerance and creativity. The 2009 winner of the prestigious French literary Goncourt Prize, Marie Ndiaye, moved here from what she called a "morose" Paris. Concerts, symposiums, debates, and lectures abound.

In a symbol of Berlin's rise, Suhrkamp Verlag, Germany's most influential publisher, relocated here from Frankfurt last January. The house is synonymous with the intellectual history of postwar Germany. In his spacious office, Suhrkamp director Thomas Sparr pulls out an invitation to an evening tribute to Mario Vargas Llosa, the Peruvian writer and Nobel laureate, that he is attending, and explains the firm's controversial decision to move.

"Berlin has become the cultural capital of Germany," he says. "It is the leading city in Europe and perhaps in the world. It is becoming what Paris was in the '50s and New York was in the '80s."

He adds, "Having said that, geography doesn't solve every problem."

The change here is palpable. Berlin may soon have its first Green Party mayor. Later in 2011 it will open a new airport. Work is beginning on rebuilding the imperial palace of the Hohenzollern family, heart of the German-Prussian empires.

Across the street from the site, the Berlin German Historical Museum is showing, without much open advertising, the first official exhibition of Adolf Hitler. It examines both the arguments Hitler used in his rise to prominence and the German people's response. It is an account of the "personalization of power" and of public complicity.

Peter Blankenburg, a high school teacher near Hamburg, says it shows "how the cultural institutions of power overwhelmed the German mind. We were seduced." But he adds that history teaching in his school still doesn't deal clearly enough with the war, and he notes that the 1930s in Europe is "a world so different" that it sometimes flies over students' heads. "We get to how Hitler came to power, but it is handled too quickly," he says. "The other problem is that my kids don't read anymore."

Elsewhere downtown, pizza and currywurst cafes are full. A roast dinner costs $12; in Paris it would be twice that. Neighborhoods are lively – someone is always playing a guitar.

Aldo Pasquini, age 28, travels from Milan, Italy, to Berlin every other month to stay with friends. He hangs out at a disco in a converted warehouse where DJs play music on three floors. "I have friends here," he says. "And there are things to do."

WHILE GERMANY'S export economy is rising, it is being built on a declining ethnic German population. That has created a new crisis. Germany needs immigrants for skilled labor, but the issue has spurred something of a backlash.

Just how sensitive immigration has become was evident last fall when Thilo Sarrazin, now a former board member of Germany's central bank, released a book, "Germany Does Away With Itself." It was an elaboration on his statement last year that Turks and Arabs are "neither willing to integrate nor capable of it." He also reiterated his belief that Turks and Kurds are genetically predisposed to lower intelligence.

German elites were angered, and Mr. Sarrazin was forced to resign his position at the bank. But the million-plus sales and other studies showing a rise in antiforeign and nationalist sentiment indicated he struck a chord. Depending on your view, it was either a dangerous airing of resentment over immigrants and Islam – or the first open national discussion on a taboo subject.

"The issue is an emotional volcano that sometimes breaks out," says Mr. Ritzmann. "People get scared when there's uncertainty."

"We need immigrants!" argues one official. "This isn't an issue. We have an aging population without a lot of natural resources. It is in our self-interest."

In fact, Germany officially became an "immigrant society" four years ago. It passed a law decreeing that citizenship no longer meant you had to have "German blood." It was a huge change.

But the law didn't eliminate antiforeign sentiment or a deep sense that "being German" means something. "Germany is cautiously moving in the right direction, but there is still a lot of animosity and outright hate," says Deidre Berger of the American Jewish Committee office in Berlin. "You can't change attitudes that quickly in a relatively homogenous society."

Today about a fifth of Germany's 82 million people are nonethnic Germans. The Turkish population in 1970 was approximately 500,000 and today numbers more than 3.5 million. The former guest workers or Gastarbeiter from Turkey, who often do menial labor such as cleaning streets or who own convenience stores, are now second- and third-generation Germans. Cem Özdemir, coleader of the Green Party, is of Turkish heritage. In 20 years, the German workforce will decline from 44 million to 35 million, estimates the Economics Ministry.

In Berlin's north Neukölln district, 90 percent of the schoolchildren come from immigrant families. The district is 40 percent ethnic. Conditions are more run-down, the street tone brusque and gritty, though Middle Eastern cafes and African hair salons colorfully share space with Dunkin' Donuts.

The area has been a cultural battleground over integration. About half the children of Neukölln need remedial help to enter German schools. Welfare rates are high, graduation rates low. Neukölln is the current media example here for the "parallel society" that many Germans are irritated by, if not afraid of, and that Sarrazin depicts as a possible future.

The term "parallel society" itself was coined by the mayor of Neukölln, Heinz Buschkowsky. The mayor comes from the political left but has become something of a guru on integration for many Germans of all political stripes. A rotund and flamboyant figure, he broke taboos by openly talking about immigrants who refuse to learn about Europe and who freeload. But he's also lauded for floating tough-love, zero-tolerance solutions on crime and education that are seen as caring, and for going to the streets to study various Muslim sects.

He created a model neighborhood-school collaborative in 2006 out of an educational institution so violent its teachers all quit. He talks about blocking social funds for parents who let their kids skip school. He advocates quick prosecutions on crime.

One German artist involved in a circle of volunteers for Neukölln families says the new German straight talk on immigrants has created some mainstream resentment. "The stereotype is that the kids sit on the street, the parents sit at home," the artist says. "The parents don't supervise the kids and are indifferent to the school system. Teachers try to be in contact but parents don't respond. They collect welfare. Meanwhile, everyone in the family seems to have the latest iPod, the latest flat-screen TV, the most expensive high-tech gear – and how is this?"

Merkel, in the middle of the Sarrazin debate last fall, announced that "multiculturalism" had failed in Germany. She was criticized for playing to the polls. In fact, the term "multiculturalism" had been abandoned years earlier (it was designed to counter the word "assimilation") and replaced by "integration."

Many experts feel German integration is actually going well. Ritzmann says one problem is the German media. "Honor killings, head scarves, forced marriages – that's 90 percent of what you hear in the media, which always plays Islam as a sensation," he says. "We don't write that 3.5 million Muslims got up, went to work, their kids went to school, got along with everyone, worked hard, and had supper with their families."

Europe's direction in the coming decade is likely to be decided by Germany, in Berlin. In the postwar era of grainy black-and-white photos of Berlin swathed in barbed wire, Europe was famously decided by French diplomacy and German brawn. The reunification of Germany has changed all that.

Paris's postwar dream of embedding Germany in a European community is diminishing: The Soviet Union's claim to universal truth and history ended, capitalism is the world model, English is the de facto language, and the ability of the French bureaucracy to run Europe is waning.

The German "special relationship" with Russia concerns many European states, including France. Germany's eastward drift is something conceived in Berlin and, others complain, without a lot of consultation. German commitment to NATO is repeated, but less ardently.

Merkel's model of a Europe of nation-states, not a "community of nations" as she recently put it, is the emerging German idea. As a fiscal union, the German concept is also different.

"The Germans aren't particularly Keynesian," says Charles Grant, director of the Center for European Reform, a London-based think tank. "They want to save and build, cut budgets, force austerity. The problem is how do states that are already immobilized cut their way to growth? Having said that, German elites are still committed to Europe. But they feel misunderstood right now as others in Europe complain."

Whether Merkel's Germany is simply changing the model and habits of Europe, or is drifting away, is a question the best and brightest theorize about. Much of Merkel's explanation for her behavior, whether on immigration or fiscal rules, is based on what Mr. Grant calls "public opinion" in Germany. Yet public opinion is not created in a vacuum.

"Merkel has not succeeded in showing she is an EU leader, even the head of Europe," says a German official in the Green Party. "She has focused on German national interests. When is the last time she gave a grand speech showing the benefits of Europe to Germany and the Germans?"

One analyst in Berlin likens the situation to a schoolroom where one student, Germany, is the star pupil and always raises her hand with the right answer. "Eventually, the other students start to hate that person."

"Germany now feels it always has the right answer," the analyst adds. "But what is good for Germany is not necessarily good for the rest of Europe. Not everyone can be German."